Is Black Friday holding retailers to ransom?

Black Friday should be the highlight of the year for retailers, a chance to drive the punters through their doors and out again via their cashiers filling the coffers along the way, but in reality is Black Friday causing more pain than profit for the retail sector?

26/11/2015

Investment Communications Team

Investment Communications Team

Freaky Friday presents operational nightmare

While the Grinch is famous for stealing Christmas, Black Friday is gaining a reputation for holding retailers captive over Thanksgiving as consumers demand more discounts than ever before.

However, they come at a financial cost through the deep discounts and the extra employee capacity needed to meet consumer demand, so it is important, as investors, to look beyond the bluster.

Travelling across the pond

Black Friday is long-established in the US with consumers flocking to the sales held on the day after Thanksgiving.

Although the concept is relatively new to the UK, and even newer in mainland Europe, Waitrose owner John Lewis has said Black Friday has changed the shape of UK retail, but is it for the better?

Home Retail, which owns the UK’s Argos chain, partly blamed its recent profit warning on the unpredictability of Black Friday sales.

Halfords, the car parts and bicycle retailer, has described the “extraordinary operational pressure” Black Friday places on the company.

Even Asda, which is owned by US retail giant Wal-Mart-Stores, despite being the importers of the idea, has protested that it will not take part in 2015’s Black Friday.

But such firms may have no option because retailers need the volume, which is why Black Friday presents a prisoner’s dilemma – if retailers don’t compete on price they will lose volume; if they do compete on price they will lose margin.

No holding back deep discount tide

It will be difficult for retailers to stem the tide, and UK consumers are leading the European charge, accounting for around two-thirds of Black Friday sales in Europe.

The Centre for Retail Research expects total UK Black Friday sales to climb to £1.39 billion and shopping over the entire weekend to near £3.5 billion, as reported on the Daily Telegraph’s website.

Online purchases will account for a significant and growing proportion of that revenue.

Experian-IMRG estimates online Black Friday sales in the UK to top £1.07 billion, up 32% year-on-year.

Latest Google trend figures show that global Google searches for the term “Black Friday” are starting earlier, lasting longer and spiking higher than ever before. The searches illustrate that consumers are potentially putting big-ticket purchases on hold and hunting for bargains instead.

And the deep discount theme is spreading.

What started out as a US phenomenon is stretching rapidly across multiple regions and countries including the likes of, Brazil, Singapore and even Romania, where one online retailer has raised the stakes on Black Friday with discounts for gold bars and coins.

Online phenomenon

China, the world’s second-largest economy, recently joined the deep discount party too.

Singles’ Day — once an obscure holiday celebrating single people — was transformed into a retail holiday by online retailer Alibaba seven years ago.

Singles’ Day brings in more than four times as much as is expected from “Cyber Monday”, which follows shortly after Black Friday in the US late in November.

In the first eight minutes of Singles’ Day Alibaba made $1 billion, in 2015. Alibaba's Singles’ Day promotions went on to bring in a record-breaking $14.3 billion in sales over just 24 hours, as reported on CNBC’s website, easily outstripping previous performances.

Clearly technology is playing an important part in enabling retailers to target and react to consumer demand to drive revenues.

In the US in 2014, Thanksgiving Day, another day for deep discounting in retail, and Black Friday saw record online retail sales supported by strong mobile growth, according to IBM data.

As technology, internet speeds and bandwidth improve online sales will only become more influential.

Survival of the fittest

Those retailers that succeed will be the best prepared by improving systems, adapting their digital capabilities and bringing in sufficient staff on the ground for the day itself.

As investors we too must be agile. From a short-term perspective those companies with dynamic online platforms and flexible workforces would appear to be best positioned to make the most of the initial spike in Black Friday demand.

As longer-term investors, however, we must seek to drown out the deep discount noise, which is by no means a barometer for future success.

For instance, in the US, in 2014, Black Friday and Cyber Monday’s revenue combined accounted for less than 10% (9.5%, to be exact) of the holiday season e-commerce revenue, according to Jordan Elkind's column on marketingland.com.

In the wider scheme of things, Black Friday and Cyber Monday barely represent the first 10 metres in 100 metre sprint.

Furthermore, success in sales does not necessarily translate into long-term stockmarket performance.

In early November 2015, ahead of Black Friday, US retailers’ shares saw the most shorting1 activity since 2012, according to data from Markit.

And you only have to look as far as the UK supermarkets such as Tesco and WM Morrison to see what damage prolonged price wars and deep discounting campaigns can do to a business’s bottom line.

Given the huge operational pressures (and costs) such volume places on retailers, this shift in shopping habits is unlikely to be beneficial to profits, but it will be difficult for retailers to put the genie back in the bottle.

1. Short selling (also referred to as shorting, taking a short position, going short): Selling assets that you have borrowed from a third party, and then buying them back at a later date to return to the lender. The short seller hopes to profit from a decline in the price of the assets between the sale and the repurchase.↩

Topics:

Important information:
The views and opinions contained herein are those of the named author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy. The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.
Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall.
Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.
The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors.
Issued by Schroder Unit Trusts Limited, 31 Gresham Street, London, EC2V 7QA. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.